Last Thursday and Friday were among the worst days ever on Wall Street. The last time that the US stock market fell so sharply, by more than 5%, was in March 2020, in the panic over the outbreak of the Covid 19 pandemic. Those two days last week were the fifth worst in the history of the S&P 500.
In the wake of President Donald Trump’s imposition of tariffs of between 10% and 54% on almost the entire world, two of the four main stock indices in New York, Nasdaq and the Russell 2000, are in bear market territory, that is to say, they are 20% below their last peaks. The S&P 500 is only 3% away from that category.
The tariffs themselves are not the cause of the falls on the stock market. It that were the case, we would see different responses by companies that will be impacted by the tariffs and those that will not. The broad negative reaction of the market, across all sectors, indicates a much worse fear: a recession in the US at best; a global recession at worst. Stagflation in the nightmare scenario.
Who is predicting a recession?
Until two months ago, no-one imagined that that question would arise. But if on Thursday, after President Trump’s presentation of the tariffs policy, the market feared a recession, after the speech by US Federal Reserve chairman Jerome Powell at the Society for Advancing Business Editing and Writing Annual Conference in Arlington, Virginia, it trembled. “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem,” Powell said.
Speculation began on the market that Trump’s measures were designed to force the Federal Reserve to cut interest rates, but Powell implicitly rebuffed that possibility. “We will continue to carefully monitor the incoming data, the evolving outlook, and the balance of risks. We are well positioned to wait for greater clarity before considering any adjustments to our policy stance. It is too soon to say what will be the appropriate path for monetary policy,” he said.
Nevertheless, the assessment on the market is that the Federal Reserve will have to reduce its interest rate three and perhaps even four times over the coming year. In the choice between high inflation and a recession, central banks generally choose to give priority to the latter danger.
In the past few days, the major banks have raised their assessments of the probability of a recession. JP Morgan now sees a 60% chance of a recession, Goldman Sachs talks about 35%, as does rating agency S&P Global. HSBC puts the probability at 40%.
How will a recession in the US affect Israel?
The trade war reached Tel Aviv as well yesterday, but the falls on the local stock market were less steep than elsewhere. While stock indices in the US and Europe fell by about 10% in two days, the Tel Aviv 35 Index fell by just under 4% yesterday and by 0.62% on Thursday. All the same, if the world’s largest economy goes into recession, the shock waves will reach Israel.
Bank Hapoalim chief markets strategist Modi Shafrir warns that “even if Israel signs a new trade agreement with the US this week that substantially moderates the extent of the tariffs imposed on it, local economic growth will be hit as the global trade war worsens.”
Leader Capital Markets chief economist Jonathan Katz adds on the positive side: “Israel’s good fortune is that the economy’s main engine is exports of technology services, which are expected to be exempt from tariffs. A global slowdown and surplus supply of commodities will reduce import prices in Israel and moderate inflation.”
Katz adds, however, that “There will be a negative wealth effect on the consumer in Israel, and in the world in general, because of the sharp falls on the capital market,” that is, Israeli consumers will feel less wealthy, and will therefore consume less.
Meitav chief economist Alex Zabezhinsky also fears the negative wealth effect, which he says will weaken consumer demand in Israel in the coming year. He has cut his GDP growth forecast for Israel from 4% to 3.5%. “The Israeli economy is likely to be hurt not by the direct effect of the tariffs, but in many indirect ways. A hit to economic growth in Israel will affect demand through a weakening of the labor market, a fall in value of the public’s savings, and a worsening of general sentiment. The expected decline in world trade will hurt Israeli companies… Over the years, the performance of the Nasdaq index has been one of the most important indicators of growth in Israel. The sharp fall sin technology stocks in response to the tariffs is liable to lead to lower investment in the sector, particularly in Israel,” Zabezhinsky says.
Zabezhinsky estimates that the local market will outperform overseas markets in the near term, largely because of the expectation of a transfer of some savings from S&P 500 tracks to general tracks. “That will boost demand for the shekel and for local securities,” he says.
